Stock Review: Keppel Corp and Semb Corp Industries

I still have my holdings in Keppel Corp (KC, bought since 2 years ago, hence I am still sitting on thousands of paper losses, but will seek to reduce exposure depending on circumstances) but I had sold off my holdings in Semb Corp Industries (SCI, bought 3 months ago) last week for a small profit. I foresee eratic and depressed prices to persist and definitely would not recommend first-time investors to take this roller-coaster ride. This is my 3rd ride on the roller coaster (1st - 2009, 2nd - 2011) and every ride has been different. This ride seems to be longer than the earlier two as the fall in oil prices had fallen to a once-in-30-years low.

The key factor that I am watching at this point in time is "Inventories and Work-in-Progress" and "Trade and other Receivables" on the balance sheet. Receivables usually means work has been fully delivered. This is because KC and SCI both did their first write-off in years, which is probably the first sign of many more to come. To write-off "receivables" in their accounting mean they remove the payment amount from the "receivable" column and tell you that they do not think that they will be able to collect that payment. The trick to deciding how much to write-off also depends on how overdue the payment is (could be as old as one year or sometimes more).  There is some benefit to write-off gradually over a few quarters because you pay less taxes and you can better manage your cash flow.

Trend of  Receivables amount on the balance sheet

Trend of Inventories and Receivables amount on the balance sheet

From the trend, receivables appear to be on an uptrend. The downtrend for KC is not to be taken as a good sign either because KC's management explained during the Q&A sessions that their projects with Sete Brasil (the brazilian company in a scandal and it at risk of bankruptcy) are still recorded under order books and not "receivables".

In terms of debt, both companies have been very stretched in the past 1 year. However, the large increase in KC's debt is largely due to the funding of the privatisation of Keppel Land in the start of FY15.

Debt (leverage) ratio

Overall, KC's balance sheet is riskier than SCI's as KC's inventories and receivables are much much more than its net assets (i.e. assets minus liabilities). However, this is also largely due to the large debt for Keppel Land. At this point in time, I had not seen any signs of how the privatisation of Keppel Land had helped the company.

SCI faces a higher concentration risk than KC. Sete Brasil contributes to 30% of SCI's rig-related order books and 20% to KC's rig-related order books. The amount SCI wrote-off was 3 times that of KC's. Taken in proportion to the inventories and receivables (charts shown earlier), the write-off effect is definitely bigger for SCI. Had it not been for the one-time divestment gains SCI made, the write-off could have made SCI's full year result in a net loss, like what happened to Semb Corp Marine.

KC, on the other hand, has investment income support that forms 25% of its recurring income, which is something built up over KC's lifetime. This to me, is a reflection of KC's management long-term investment focus and risk appetite, which is one of the main reasons why I have the faith to endure the long winter with KC.

Oh, and the dividend yields for KC are higher, so I am happy to get paid to ride this roller coaster.

The writer owns units of Keppel Corp shares at the time of writing.

References:

1. KC Financial Reports
2. SCI Financial Reports